How to Compare Debt Consolidation Vs. Debt Settlement
Determine if your loan is eligible., Look at your current account interest rates., Consider the tax impact., Consider the impact to your credit., Evaluate if you have the funds for a smaller pay-off., Experience the benefits of one payment., Be...
Step-by-Step Guide
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Step 1: Determine if your loan is eligible.
Be aware that not all loans are available for consolidation or settlement.
Debt settlement, for example, typically focuses on unsecured debts, such as credit card balances.
You are generally not able to settle on a car note or home loan.
Consolidation is similar, but provides a bit more flexibility in areas of student loans, for example.An unsecured debt is one without a connected lien on a piece of property, such as a car or home.
The debt is unsecured by a source of collateral.
A credit card balance is unsecured, whereas a home loan is backed by a home’s equity.
Your attempts to consolidate can also face obstacles.
The terms of your separate loans may prevent them from being transferred or merged into one.
In addition, certain lenders may only offer consolidation for loans above a certain sum. -
Step 2: Look at your current account interest rates.
If you are suffering from a particularly high interest rate, it may be a good idea to consider consolidation.
Under consolidation you may have a higher overall balance, but you can generally negotiate or find a low interest rate.
This will then allow you to pay directly towards the balance, lowering the overall cost of the loan.Make sure that you pursue a fixed-rate consolidation loan.
A variable rate loan may start out lower, but could increase a great deal over time. , Be aware that any money that you save via a debt settlement could be considered income when you file your taxes.
Your creditors will generally report this information to the IRS too.
In contrast, debt consolidation agreements will rarely impact your taxes, aside from giving you less interest to deduct at the end of the year.If you have any concerns about your tax situation, it is a good idea to speak with a tax advisor or CPA prior to making any debt relief agreements. , A consolidation will show a larger amount owed on your creditor report.
However, if you keep up with all payments, it will not overly impact your final report.
A debt settlement can lower your credit score in the short term, but this can be off-set by the benefits of making consistent new payments or paying off the debt entirely., Be aware that if you do not pay off a debt settlement in one lump sum, then you may need to agree to monthly payments with fees attached.
This can increase the overall amount that you owe.
A consolidation agreement, on the other hand, may contain fees at the outset, but generally not for each individual payment., If you’ve fallen behind in your payments because you simply have too many to keep track of, then consolidation might be a good option for you.
Instead of dealing with numerous companies and multiple payment amounts and due dates, one company will own and service your loans.
You will have a single payment for a set amount.Debt settlement can also help minimize payments, but eliminate them entirely if you agree to pay a lump sum to close out the loan. , If you are getting a consolidation loan, unless you have perfect credit, you will likely be asked to provide some sort of security.
This makes your final loan a “secured loan.” Your collateral can be your car or even your house.
However, be aware that your lender can seize these properties if you fail to make your new loan payments as agreed.Debt settlement usually does not involve taking out a new loan.
This means that your other property is usually safe from seizure. , In exchange for providing you with a lower interest rate, your consolidation loan may have an extended payment period.
This means that you will be paying longer to offset the new larger size of the loan.
You may also end up paying more in interest over time, despite the lower rate.For a settlement, the repayment term will likely be abbreviated.
You might even pay one lump sum and be done with the loan entirely. , If you are unable to pay the balance in one lump sum, you may need to pay your settlement balance via a monthly withdrawal from a designated account.
You will want to make sure that you can manage keeping funds in this account. , It may help to get out a piece of paper, draw a line down the middle, and write consolidation on one side and settlement on the other.
Then, write down the pros and cons for each option below the headings.
Look over the chart to get a summary of your current situation.
For example, under a “Consolidation,” you might put, “only one bill to pay.” -
Step 3: Consider the tax impact.
-
Step 4: Consider the impact to your credit.
-
Step 5: Evaluate if you have the funds for a smaller pay-off.
-
Step 6: Experience the benefits of one payment.
-
Step 7: Be aware of the collateral requirements.
-
Step 8: Beware of the repayment period.
-
Step 9: Consider the automatic withdrawal of funds.
-
Step 10: Create a comparison chart.
Detailed Guide
Be aware that not all loans are available for consolidation or settlement.
Debt settlement, for example, typically focuses on unsecured debts, such as credit card balances.
You are generally not able to settle on a car note or home loan.
Consolidation is similar, but provides a bit more flexibility in areas of student loans, for example.An unsecured debt is one without a connected lien on a piece of property, such as a car or home.
The debt is unsecured by a source of collateral.
A credit card balance is unsecured, whereas a home loan is backed by a home’s equity.
Your attempts to consolidate can also face obstacles.
The terms of your separate loans may prevent them from being transferred or merged into one.
In addition, certain lenders may only offer consolidation for loans above a certain sum.
If you are suffering from a particularly high interest rate, it may be a good idea to consider consolidation.
Under consolidation you may have a higher overall balance, but you can generally negotiate or find a low interest rate.
This will then allow you to pay directly towards the balance, lowering the overall cost of the loan.Make sure that you pursue a fixed-rate consolidation loan.
A variable rate loan may start out lower, but could increase a great deal over time. , Be aware that any money that you save via a debt settlement could be considered income when you file your taxes.
Your creditors will generally report this information to the IRS too.
In contrast, debt consolidation agreements will rarely impact your taxes, aside from giving you less interest to deduct at the end of the year.If you have any concerns about your tax situation, it is a good idea to speak with a tax advisor or CPA prior to making any debt relief agreements. , A consolidation will show a larger amount owed on your creditor report.
However, if you keep up with all payments, it will not overly impact your final report.
A debt settlement can lower your credit score in the short term, but this can be off-set by the benefits of making consistent new payments or paying off the debt entirely., Be aware that if you do not pay off a debt settlement in one lump sum, then you may need to agree to monthly payments with fees attached.
This can increase the overall amount that you owe.
A consolidation agreement, on the other hand, may contain fees at the outset, but generally not for each individual payment., If you’ve fallen behind in your payments because you simply have too many to keep track of, then consolidation might be a good option for you.
Instead of dealing with numerous companies and multiple payment amounts and due dates, one company will own and service your loans.
You will have a single payment for a set amount.Debt settlement can also help minimize payments, but eliminate them entirely if you agree to pay a lump sum to close out the loan. , If you are getting a consolidation loan, unless you have perfect credit, you will likely be asked to provide some sort of security.
This makes your final loan a “secured loan.” Your collateral can be your car or even your house.
However, be aware that your lender can seize these properties if you fail to make your new loan payments as agreed.Debt settlement usually does not involve taking out a new loan.
This means that your other property is usually safe from seizure. , In exchange for providing you with a lower interest rate, your consolidation loan may have an extended payment period.
This means that you will be paying longer to offset the new larger size of the loan.
You may also end up paying more in interest over time, despite the lower rate.For a settlement, the repayment term will likely be abbreviated.
You might even pay one lump sum and be done with the loan entirely. , If you are unable to pay the balance in one lump sum, you may need to pay your settlement balance via a monthly withdrawal from a designated account.
You will want to make sure that you can manage keeping funds in this account. , It may help to get out a piece of paper, draw a line down the middle, and write consolidation on one side and settlement on the other.
Then, write down the pros and cons for each option below the headings.
Look over the chart to get a summary of your current situation.
For example, under a “Consolidation,” you might put, “only one bill to pay.”
About the Author
Janice Evans
Enthusiastic about teaching cooking techniques through clear, step-by-step guides.
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